2006 (4) TMI 199 - AT - Income Tax

Validity of Order passed by the CIT u/s 263 - erroneous and prejudicial order - interest allowed in the assessment u/s 36(1)(iii) - HELD THAT - In the present case, it is an unchallenged fact over the past several years that business losses were allowed to be adjusted under s. 72 of the Act, which means that the Department has acted on the footing that the assessee did carryon business activities in the year in which the losses were adjusted. The profits/losses in share dealing were assessed under the head Business and the dividend income was taxed as Income from other sources because of the specific requirement of the Act, though in fact it was the business income of the company. Considering the past record, it would defeat the rule of consistency if a departure is allowed to be made for the year under consideration. In the case before us, though it is only in the computation of income that the shares of Max India Ltd. are shown as trading assets but in the balance sheet they are shown under investments , still the acceptance of the Department in several years in the past that the shares were held as stock-in-trade, indicated by their conduct in accepting the profits or losses on sale of those shares under the head Business is a circumstance strong enough to displace any ambiguity created by the entry in the balance sheet. Thus the case can be brought under the principle laid down by the Supreme Court in Bengal Assam Investors Ltd. vs. CIT 1965 (11) TMI 31 - SUPREME COURT by reason of the actual conduct of the assessee supported by its income-tax assessments. That apart, though it may not be necessary to go to that extent, it may be noticed that in CIT vs. Amalgamations (P) Ltd. 1997 (4) TMI 8 - SUPREME COURT there is an observation of the Supreme Court that the Madras High Court, from whose decision the appeal arose, has rightly pointed out that the business of the assessee-company is the holding of investments and if with reference to the business of holding investments, any expenditure had been incurred that could have been allowed as a deduction . Thus, we set aside the order of the CIT passed u/s 263 and allow the appeal with no order as to costs.

Issues Involved:
1. Validity of the CIT's revision order under Section 263 of the IT Act, 1961.
2. Disallowance of proportionate expenses related to dividend income under Section 14A.
3. Allowability of business losses under Section 72.
4. Allowability of interest under Section 36(1)(iii).

Detailed Analysis:

1. Validity of the CIT's revision order under Section 263:
The CIT issued a notice under Section 263 proposing to revise the assessment on two grounds: (a) disallowance of proportionate expenses related to dividend income under Section 14A, and (b) disallowance of business losses under Section 72 due to no business activity during the year. The assessee argued that the CIT's order was invalid as it was based on a ground not mentioned in the show-cause notice, i.e., the allowability of interest under Section 36(1)(iii). The Tribunal agreed with the assessee, stating that an order under Section 263 cannot be passed on a ground not stated in the show-cause notice, citing various authorities including CIT vs. G.K. Kabra and CIT vs. Jagadhri Electric Supply & Industrial Co.

2. Disallowance of proportionate expenses related to dividend income under Section 14A:
The CIT initially proposed to revise the assessment by disallowing proportionate expenses related to dividend income under Section 14A. The assessee contended that the proviso to Section 14A prevented reopening or rectifying assessments for the assessment year 2001-02 or earlier to increase the liability by invoking Section 14A. The CIT ultimately did not pursue this issue in his final order, indicating satisfaction with the assessee's objection.

3. Allowability of business losses under Section 72:
The CIT disallowed the business losses carried forward under Section 72, asserting that the assessee did not carry on any business during the year. The assessee countered that the shares of Max India Ltd. were held as trading assets, and the absence of transactions in those shares during the year did not mean no business activity was carried on. The Tribunal found merit in the assessee's argument, noting the Department's past acceptance of the assessee's business activities and the rule of consistency in income-tax assessments as upheld by the Supreme Court in Radhasoami Satsang vs. CIT and the Delhi High Court in CIT vs. Neo Poly Pack (P) Ltd.

4. Allowability of interest under Section 36(1)(iii):
The CIT's order disallowed the interest under Section 36(1)(iii) on the ground that no business activity was carried on during the year. The Tribunal noted that the AO had allowed the interest deduction after due application of mind, evidenced by the assessee's detailed submissions and the AO's acceptance of the claim. The Tribunal emphasized that the power of the CIT under Section 263 is to examine the record of any proceeding, not just the final order, to determine if the AO's order is erroneous and prejudicial to the interests of the Revenue. The Tribunal also highlighted that the rule of consistency should be maintained, especially when the Department had accepted the assessee's business activities in past assessments.

Conclusion:
The Tribunal set aside the CIT's order under Section 263, allowing the appeal and emphasizing the importance of the show-cause notice specifying the grounds for revision, the rule of consistency in income-tax assessments, and the necessity for the CIT to give the assessee an opportunity to address the specific grounds for revision.

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